The highest-yielding REITs – Why you don’t want to own them

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Everyone’s on the lookout for high-yielding stocks, and real estate investment trusts (REITs) are among the best places to find high-dividend stocks with a strong track record. But REITs are not created equal, and the highest-yielding REITs may cost you more than you end up gaining.

Here are the stock market’s highest-yielding REITs – and why you want to look at safer choices.

The market’s highest-yielding REITs

Here are the highest-yielding equity REITs trading on major U.S. exchanges as of Feb. 2, 2024.

Those yields are at real nosebleed levels, indicating that they may be unsustainable. When yields reach such high levels, it indicates that investors are skeptical that the company will be able to continue the payout in the future. But you’ll need to dig into why that may be the case.

In particular, this list is dominated by mortgage REITs, a specialized kind of company that buys mortgages and finances them with borrowed money. The payouts from mortgage REITs depend significantly on the state of interest rates, which fluctuate over time.

Key reasons that a dividend yield may be high include:

• The dividend will grow slowly: Investors are factoring in the total return they’re likely to get from a stock, including both the current yield and any growth in the payout. High yields imply that the payout is unlikely to grow substantially in the future, if at all. So if the payout is unlikely to grow, investors demand to be compensated with a higher yield now.
• The business is in serious trouble: A stock’s stated yield is also likely to be high when a business is in serious difficulty, and investors mark down the stock ahead of a dividend cut. The dividend is the easiest place for a company to access cash flow for those that need it, though some businesses can quickly fall apart if their problems become too dire.
• The dividend is variable and will likely fall: Some REIT payouts are variable in nature – for example, from mortgage REITs such as AGNC Investment and Annaly Capital. So investors are likely pricing them with high yields today because they expect the payout to fall in the future, and the stock price will likely go along with it.
• Investors remain skeptical: Even if there’s ultimately no fundamental reason, a REIT may have a high yield because investors simply remain skeptical that the yield will not continue. While investors are often proven right in time, they’re not always right.

So if you’re looking at high-yield dividend stocks or REITs, you’ll want to understand whether the payout is sustainable instead of simply buying the stock and hoping the payout remains steady. You’ll need to carefully assess the business and its financials to see what the future may hold.

But as Warren Buffett says, there are no called strikes in investing. So you can pick and choose what you want to invest in, and you have many other attractive opportunities in the REIT world.

The high-yield REITs to look for instead

Instead of stretching for the highest REIT yields, it’s often better to dial back your expectations and look at lower and more sustainable yields. Yields in the 5 or 6 percent range tend to be high but may be sustainable, if the business is on solid footing. Here are some REITs in that area.

While this level of payout may be safer overall, you still want to investigate the company and its financials, if you’re investing in individual stocks. One useful thing to look for here, too, is how much the payout has grown over time. A growing payout suggests not only that the business is healthy but also that management sees that payout as a way to reward shareholders.

Realty Income, for example, has an enviable track record of raising its payouts since its 1994 IPO. The company has raised its dividend in 105 consecutive quarters, averaging about 4.3 percent annually since its market debut. That record puts it among a group of solid income stocks called the Dividend Aristocrats, and it’s also among a handful of monthly dividend stocks.

If you’re not comfortable doing the kind of financial analysis needed to invest in individual stocks, another option is to buy a top dividend fund, which includes many different dividend stocks. You’ll enjoy the relative safety of diversification and can still earn an attractive payout. You can even purchase a dividend fund that’s focused on REITs, if that’s what you’re looking for.

Finally, if you’re on the hunt for attractive dividends, it may be worth your time to find a skilled financial advisor who has that kind of expertise. Bankrate offers a financial advisor matching tool to match clients with advisors in their area in minutes.

Bottom line

Investors looking for the highest yields in the REIT world should be careful that they’re not buying a stock that is poised to fall, costing them more money than they’d earn with the higher payout. More savvy investors stick with lower but proven dividend stocks, especially those that have grown their payouts over years, even decades, helping the stock to climb ever higher.